In Part 1 of our series on building the business case for your human capital initiatives, we discussed the need to form alliances and influence decision-makers. In Part 2, we showed how to clarify the business need, build the right team, and evaluate solutions.
Those discussions prepared you for the number-crunching so essential to a solid business case.
Estimating costs and benefits of an investment may seem intimidating for non-financial leaders, but if you have followed along with us you have a team in place, and you have laid the groundwork. Now it is just a matter of following your Finance partner’s guidance.
Partner with Finance
Finance will be your best ally. Your Finance team knows the policies, procedures, and methods you need to follow, and will advise you on how to present your case. You will build relationships that will serve you well.
By this time, you should have narrowed your solutions down to the top three. You will need to estimate costs and benefits for each of them, but how much of that analysis you present to your executive team will depend on their preferences. Your CFO and sponsor can guide you.
Use your company’s income statement as the format for your estimates. CXOs are accustomed to reading financial statements. They will expect items to be in a particular order and format.
Know the Planning Horizon
You will need to show costs and benefits over a defined planning period. Your company may have a policy for the length of time depending on the type of project you are proposing.
Cloud technology has changed the way we estimate ROI for some business applications. Since cloud technology vendors are constantly updating their platforms, the life cycle is theoretically infinite. Most companies have a standard planning period for technology, but it probably should be longer for a cloud subscription than for hardware and infrastructure.
Create an ROI Worksheet
Your Finance partner will advise you on the format and planning period for your ROI worksheet. If you don’t have a standard format, you can use the sample below. The purpose of the ROI worksheet is to capture your costs and benefits in one place. Your worksheet will have dozens of hundreds of individual cost and expense lines (Please click on tab to download free ROI worksheet).
Accountants break down costs into two areas: project costs and operating expenses.
To estimate total cost, include all the expenses necessary to implement the solution, including the capital costs of acquiring assets.
Project costs are usually simple. They include personnel, travel, consulting, and any other expenses that are not used to purchase an asset.
Calculating capital costs require the expertise of your Finance partner. Amortization rules are complex. You may need to show the cost of an asset in the first year, or you may need to spread it out over a depreciation period.
Transition costs are the result of temporary disruption. Include spikes in support calls, one-time training costs, and temporary dips in productivity. Explore the concept with your experts to make sure you capture realistic estimates.
To calculate operating cost, you will need to consider the cost of maintenance, licensing, support, facilities, training, and any other ongoing cost. Consider also costs that other business unit may incur and be sure to discuss them with the business unit before you present your case.
Some initiatives will lower operating costs. Be sure to include those in your calculations. If you are automating or improving a process, you may have labor savings you can add in the benefits.
In our next article about the business case for HCM initiatives, we will discuss how to calculate “soft” benefits and make them tangible so you can include them in your ROI calculation.
Pixentia is a full-service technology company dedicated to helping clients solve business problems, improve the capability of their people, and achieve better results.